I recently had a call with a representative from an investment strategy that focuses on investing in mining companies equities. This fund manages almost $2 billion in assets.
I’ve covered precious metals and precious metals equity funds for a while. Investing in gold never made sense to me. Based on my experience, I’ve come to my personal conclusion that investors will invest in gold for certain reasons, but will explain the price movement of gold differently in different market environments. The last 18 months is a great example of this. Many investors flocked to gold due to a high inflation environment and as equity markets declined, but gold prices did not provide that hedge as many anticipated. I’m not surprised by this at all.
Investors’ Reasons to Invest in Gold and What Has Happened
A Hedge on Inflation: Gold investors have indicated that gold is a hedge on inflation, so if inflation is high, gold prices should rise. Under this assumption, with inflation hitting some metrics over 9%, gold prices should have skyrocketed. As of right now (you can look it up), gold prices are down for 2022 in U.S. dollar terms. We’ll for U.S. investors, gold did not hedge out higher inflation.
A Hedge on Risk Assets: Gold investors have indicated its a great diversifier to risk assets in a risk asset / equity market selloff. In 2022, equity markets around the world have sold off significantly, with some speculative areas down over 70%. With gold prices also down in 2022, gold did not hedge against a selloff in risk assets.
A Hedge on the U.S. Dollar: If investors believe that gold prices can rally in a devaluing of the U.S. dollar, then the opposite can happen if the U.S. dollar rallies, which has been the case this year. In 2022, the U.S. Dollar Index rallied strongly as investors sought the U.S. dollar as a safer haven currency relative to other foreign currencies. In this environment, if gold investors were trying to hedge against high inflation and/or a selloff in risk assets, there gold position was overwhelmed by a stronger U.S. dollar. It remains to be seen whether a weaker U.S. dollar will translate into stronger gold prices.
The investment representative of the investment strategy I spoke with stated that their investment team does not speculate or make significant investment decisions based on what future gold prices will be. The representative indicated to me that he used to work more closely with traders and gold price prognosticators in the past and that they all had price targets. They get paid to make price targets, so price targets are made. He indicated that most of the price predictions were always all over the place and would change, making these gold price forecasts fairly irrelevant. If they are somewhat irrelevant, then using them as a material factor when making investment decisions doesn’t make much sense.
Consider This
If gold prices rallied this year along a higher U.S. dollar, gold investors would come to the conclusion that gold is a solid inflation hedge. If gold prices rallied as equity markets sold off, gold investors would come to the conclusion that gold is a solid hedge on risk assets. If the U.S. dollar declined, but inflation was tame and risk assets were flat, gold investors would come to the conclusion that gold was a solid hedge on a falling U.S. dollar.
Don’t be someone that changes their mind on what is moving gold prices. Gold prices can be driven by any number of cross factors, from fundamental drivers to technically-driven price trend reasons.
Summary
If professional investors cannot accurately predict gold prices, and other professional investors don’t utilize forecasted gold prices to make material investment decisions, then other less sophisticated/non-professional investors should probably not make investments based on their less informed views on where gold prices are headed.
Gold does not generate income so investors generally invest in gold, speculating that the price will go up for some reason or reasons. Gold is a capital appreciation or capital depreciating asset, that’s it. It is a “yellow rock” as I like to call it. As an investor, if you do not have a clear reason why gold prices should go up or change your reason why gold prices should go up or have moved a certain way in the past, you should probably reconsider allocating to gold as an investment.